Cox v. Stokes, 156 N.Y. 491 (N.Y. 1898)

Vann, J.

As the respondents do not appeal, they are bound by the findings of fact made by the trial court; while the appellants are bound by all to which they did not except, and since the affirmance by the General Term, by all even of those excepted to that find any reasonable support in the evidence. (White v. Benjamin, 150 N. Y. 258.) Hence, in reviewing this case, we must start with the assumption that Mr. Stokes promised to perform the reorganization agreement, and was bound thereby, for the evidence is ample to sustain

the finding to that effect, and the respondents do not question it hy appealing. That promise was founded on the consideration that the receivers’ certificates held by him, as to which serious questions existed that were pending in the courts, should be expressly rendered valid by an amendment of the decree in foreclosure. That amendment was promptly made by the consent of the plaintiffs and other bondholders through the reorganization committee, and through the same agency the litigation pending at the time to test the validity of the certificates was discontinued and ended. “ When a defendant has actually received the consideration of an agreement by a voluntary performance of an act by the other party, upon his proposition or suggestion, such performance constitutes a consideration which will uphold the defendant’s promise.” (Marie v. Garrison, 83 N. Y. 14, 26.) Moreover, the settlement of a doubtful or disputed claim is a good consideration. (White v. Hoyt, 73 N. Y. 505.)

At this point of time, therefore, we have a binding contract, executory on the part of Mr. Stokes and executed on the part of the committee. It was found and is conceded that he has not performed that contract, and the only question presented, aside from that relating to the form or extent of the relief, is whether he has in any way been lawfully relieved of his obligation to perform, or from the consequences which would ordinarily follow from his breach of the contract. He agreed to receive in round numbers $700,000 in the first mortgage bonds of the new company, whereas he actually received $900,000; and he agreed that the second mortgage bonds of the new company should cover all the property on which the mortgage foreclosed was a lien, when in fact the stocks and securities, through which the Bankers & Merchants’ Telegraph Company controlled the connecting' links in their system, were omitted from that mortgage, and those stocks and securities were delivered to him as collateral to certain loans and advances that he made. He also agreed to buy in the property at the foreclosure sale for the benefit of the reorganization committee, and in accordance with the

plan agreed upon, and for this reason there was no competition in bidding ; but when the auctioneer struck the property off to him one of the attorneys for the plaintiff in the foreclosure suit said, “{For the reorganization committee?” and Hr, Stokes replied, “ No, for myself.”

Several theories are relied upon to justify the action and non-action of Mr. Stokes, upon none of which, however, did the courts below unite in pronouncing judgment. Those theories are (1) that there was a rescission of the reorganization agreement; (2) that there was a lawful modification of that agreement; (3) that there was a ratification by the plaintiffs, and (í) that there was such laches oh their part as to defeat their cause of action. We will now consider these theories of defense in the order named.

1. Rescission. It is not claimed that Mr. Stokes could rescind his contract upon any ground that existed when it was made, such as fraud, inadequacy of consideration, mistake or illegality. Nor could he rescind for non-performance by the reorganization committee representing the bondholders, for the contract was at once performed by them, so far as it related to him personally, by the amendment of the decree so as to declare his certificates valid, and the withdrawal of the appeal brought to test their validity. There was no failure of consideration and no reservation of the right to rescind. The ground upon which it is now claimed that a rescission could have been made is that through the wrongful act of a third party the property had become of less value than it was when the contract was entered into. There was, however, no rescission upon this ground or upon any other. The only evidence of any attempt to rescind is that Mr. Stokes, on the day after the wires were cut, stated to his own attorney, Mr. Lauterbach, in the presence of Mr. Townsend, the chairman of the reorganization committee, that he could not carry out the agreement.

Effective rescission requires a lawful right to rescind, due notice of an intention to rescind and the restoration of benefits received by the party attempting to rescind, so that the other

party may be placed in statu quo. Even if the most complete right of rescission exists it cannot be exercised without a return or an offer to return such benefits. The only exception emphasizes the rule. (Kley v. Healy, 127 N. Y. 555, 561.) Mr. Stokes made no attempt or offer to return the substantial •benefits that he had received. He did not procure or offer to procure a reamendment of the decree by' striking out the clause recognizing the validity of his certificates, or to revive the appeal. Retaining all that he had received, he simply said that he could not perform.

A contract cannot be thus put aside, for one party cannot speak for both, or bind and loose both at his discretion. Even upon the assumption that Mr. Stokes had the right to rescind, and that his notice of intention was sufficient, there, was no valid rescission on account of his failure to restore the benefits and to place the other parties in the same condition that they were when the contract was made. It is, however, very doubtful whether Mr. Stokes intended his declaration to his own counsel, in the presence of a member of the reorganization committee, to be a notice of intent to rescind, for two months after the alleged rescission and six weeks after the sale in foreclosure, he made an affidavit in a preceding commenced by one Bill to have the foreclosure decree amended so as to provide that the receivers’ certificates should share in the proceeds of the sale in the order of the equities of the claims underlying them, in which he recognized the reorganization agreement as in existence, made no claim that it had been rescinded, and admitted that he was to buy the property for the committee and turn the same over to them, or to any corporation to be designated by them. A similar affidavit was made by Mr. Townsend in another legal proceeding, and used in court with the knowledge and consent of the. counsel for Mr. Stokes. We think that the oral agreement of Mr. Stokes with the committee was never rescinded or abandoned.

2. Modification. The reorganization committee were, in a broad sense, trustees for the benefit of the bondholders and were bound to protect their interests in every reasonable way.

Tlieir powers were defined and limited by the reorganization agreement. While they had a wide discretion as to all matters not specifically provided for, as to those matters they were bound to compliance with the stipulations of "the agreement, which they could neither set aside nor disregard. They had no power to change that agreement without the consent of the bondholders, whose representatives they were. They could not recast it nor surrender rights which it expressly secured to the bondholders. In violation of their duty they entered into a modification of the reorganization agreement and thereby materially increased the amount of first mortgage bonds going to Mr. Stokes and provided that the stocks and securities of the subsidiary companies should be left out of the new mortgages and that the new corporation should be authorized to “ dispose of them upon such terms as it may deem proper, using the proceeds thereof for the benefit of itself.” This subjected these securities to the will of Mr. Stokes, who was to be the owner of $2,250,000 out of the $3,000,000 of stock of the successor company. When this property of the bondholders was subsequently used to secure money lent by Stokes to the new company, it virtually went to secure him individually for loans made to himself in a corporate capacity. The reorganization agreement was specific in providing that the new mortgages should cover all the property, including the stocks and securities by which the subsidiary lines were controlled. If they had power to modify or dispense with this stipulation, they had power to disregard the agreement in every particular and to enter into a new and wholly inconsistent contract without the consent of the bondholders for "whom they were acting. They could thus set aside and subvert the very instrument which was the tment, or that in doing so they acted in good faith. Even if .they acted in good faith as matter of fact, they are presumed to have acted in bad faith as matter of law. They, in effect, gave away property which belonged to the bondholders and of all their It is idle to claim that they could express stipulation of the agree-

which was essential to the control of the auxiliary lines, and without which the new company, whose corporate name' expressed the idea of uniting all the lines, would become substantially helpless because its system would be destroyed. Both of the courts below united in holding that the reorganization committee had no power to thus alter the terms of the reorganization agreement, except by the consent of all the bondholders who had become parties thereto, although the Special Term held that the increase in the amount of first mortgage bonds of the new company which Hr. Stokes was to receive was within the power conferred by the original agreement. This was put upon the ground that they could use first mortgage bonds to raise money in order to carry out the plan, overlooking the fact that Hr. Stokes had already agreed to provide such money as should be needed for that purpose. Of course, if Stokes’ advances, together with his receivers’ certificates, should amount to $900,000, he Avould be entitled to that sum in the first mortgage bonds of the new company, but the committee modified the agreement so as to give him $900,000 in such bonds, whether his advances and receivers’ certificates amounted to that sum or not. This modification, in view of subsequent events, may not be important, but the attempt to give Hr. Stokes the stocks and securities in question for any purpose whatever was beyond the power of the committee, and a violation of 'the trust confided to them. If they had power to give him the auxiliary lines, they could have given him the main line. If, by their own action, they could enlarge their powers in one respect, they could do so in all respects. Their action was beyond their authority and void. They could not add to their authority by changing the agreement, which was the source and limit of their power, any more than one can add to his stature by taking thought.

3. Ratification. The trial court found that on August 10th, 1885, one of the plaintiffs ratified the modification agreement, made three days before, by requesting Hr. Stokes “to get back ” from the receiver the sum of $2,000 that he had

advanced to meet his expenses, and accepting repayment accordingly. These expenses, according to the decree in foreclosure, were the first lien on the proceeds of the sale, and the amount paid down in cash to the referee on July 31st, the day of sale, was much more than was necessary to cover them. Moreover, Mr. Stokes had agreed to furnish the receiver with all funds necessary to carry out the plan of reorganization,, which included the receiver’s expenses. There was no express agreement to ratify, for nothing was said upon the subject. There was no consideration for any implied agreement, for Mr. Cox received nothing but what was due him in any event, and the money for the purpose was at the time, or should have been, in the receiver’s hands. No one was misled by the transaction’ nor was any action based thereon by any one to his prejudice. Mr. Cox did not agree to doeanything if the repayment was made.

The facts, however, according to the undisputed evidence, were not precisely as found by the court. The sum of $2,000 was not advanced by either of the plaintiffs, but by Farley Cox, a brother of Townsend Cox, who asked Mr. Stokes to get the receiver to pay back the money to the one who had lent it to him. Mr. Guthrie, the counsel for the reorganization committee, and Mr. Townsend, its chairman, made the same request. The plaintiffs’ firm, which had been dissolved at the time, had nothing to do with the loan or the repayment thereof. Neither of the plaintiffs was shown to be directly or indirectly liable for the loan. . While Stokes, in fact, furnished the money with which the receiver repaid Mr. Farley Cox, the receiver was lawfully bound to pay the loan from money that he had received for that purpose. If he had used the money for another purpose he was not discharged from the obligation of payment on that account. Mr. Stokes was not requested by. either plaintiff to furnish the money, and it does not appear that he advanced anything which, under the reorganization agreement, he was not obliged to pay. Neither his position nor that of the receiver was in any way altered by anything said or done by Mr. Cox. No defense

founded on waiver or estoppel was pleaded, and, as we think, none was established, for scarcely one of the essential elements was. proved. There was no evidence that the plaintiffs intended to forego any advantage or to surrender any right. Nothing was done by them inconsistent with the' existence of the rights now sought to be enforced or with their intention to rely upon those rights. There was no consideration, intent, misleading conduct, change of position or mutual understanding from which a waiver or estoppel could properly be inferred.

4. Laches. Neither of the opinions written in the courts below gave this point any notice. Whether the equitable doctrine of laches, as distinguished from the Statute of Limitations, now exists in this state, is open to serious doubt. (Galway v. Metropolitan Elevated Ry. Co., 128 N. Y. 132, 143; Derby v. Yale, 13 Hun, 273; Tliroop’s note to section 414, Code Civ. Pro.; Wood on Limitations, 62; 2 Perry on Trusts, § 896.). But, whatever the law upon the subject may be,, there is no reasonable foundation for the claim that the plaintiffs by their laches have forfeited their rights under the reorganization agreement and the violation thereof by certain of the defendants. This action was commenced within two weeks after the referee’s report of the sale in foreclosure was filed, and within thirty days after the sale the Boebling action, which is still undetermined,.- was "brought against these same defendants attacking the modified agreement, asking that the reorganization agreement should be performed and that the United Lines Telegraph Company should be directed to execute the first and second mortgage bonds covering all the property sold and purchased at the sale. Several motions to set aside the sale had also been made, and one of them at least was pending for a long time. Knowing that their proceedings were thus attacked, Stokes, the committee and the United Lines Telegraph Company continued, in defiance of the reorganization agreement, to carry on their scheme, as embodied in the modified agreement. Under these circumstances no one could have been misled, simply because

the plaintiffs waited to see whether relief would come through the pending litigation, or whether the sale would be confirmed, before commencing their action. The defendants proceeded at their peril, because they had full notice that some of the bondholders at least had not acquiesced in their unlawful acts, but were active in the assertion of their rights. We repeat, as applicable to this case, so far as the question of laches is concerned, the language of the court in Boardman v. Lake Shore & Michigan Southern Ry. Co. (84 N. Y. 157, 183): “ It appears that there has been, ever since the expiration of the time when the dividends were due, an active and continuous litigation, and a sharp controversy in the courts with other parties against the old corporation and the defendant, by stockholders who are similarly situated with the plaintiffs, to recover dividends upon the preferred stock. * The defendant necessarily was acquainted with the character of the litigation, with the questions involved and the claim of the preferred stockholders to the dividends ; and in the face of these facts, with full notice of the nature of the claim, has no ground for insisting that it would have acted otherwise if the plaintiffs had sued at an early day. It was not required that each particular stockholder should sue for his share of the dividends to preclude the defendant from claiming an acquiescence and estoppel; and it is quite sufficient that it was advised of the character of the claim of the respective stockholders. The plaintiffs and other stockholders were entirely justified in awaiting the result of suits pending without incurring the hazard of losing "their rights on account of the lateness of their demand.” So the plaintiffs in this action, under all the circumstances, were not obliged to sue more promptly in order to save their rights. They had a cause of action and did not lose it by their silence, even if they knew that Hr. Stokes was advancing money on the strength of the modified agreement, because he is presumed to have known that that agreement was made without authority, and he had notice from various legal proceedings against himself and others that the bondholders were attacking it on that ground.

There was no estoppel, because he had no right to act in reliance upon the silence of some bondholders, when others were acting in behalf of all. The summons and complaint in the Eoebling suit were served on him individually and as president of the United Lines Telegraph Company in August, 1885. The object of that action was to restrain the execution of the modified agreement and to compel performance of the reorganization agreement. The pendency of this representative action wás sufficient notice to Mr. Stokes and the other defendants therein that the bondholders were actively resisting the new scheme and were insisting that he should perform his contract, and neither he nor his company can now claim that their subsequent action was taken in reliance upon the acquiesence of the bondholders. The reorganization agreement was signed by more than one hundred different parties, and it was not necessary that each should sue in order to preserve his rights. Suit by one of a class, in behalf of all, relieves all from the imputation of laches.

Without expressing any consideration of incidental points urged by the learned counsel for the respondents, we have reached the conclusion that no absolute defense was established and that the plaintiffs are entitled to some relief, the extent of which must depend upon the facts found on the new trial, which it is our duty to award. In view of the large advances made by Mr. Stokes, and the doubtful success of the enterprise in any event, it may be that the relief will prove of slight value to the plaintiffs, but we .cannot withhold justice from them because their rights are small. Doubtless specific performance of the rights of the bondholders cannot now be had in justice to third parties. (Farmers' L. & T. Co. v. B. & M. Tel. Co., 119 N. Y. 15, 23.) We think, however, that upon the facts as they now appear the plaintiffs are entitled to an accounting upon an equitable basis, such as the probable value of the new second mortgage bonds if the reorganization agreement had been performed, crediting Mr. Stokes with all moneys properly advanced or expended by him, or to such damages as they can establish for the breach of the agreement.

At present they have nothing for their bonds deposited with the committee of the par value of $731,000, the actual value of which, though much less, was something. They have never received even the second mortgage bonds, and the absolute dismissal of their complaint upon the merits left them helpless.

The judgment should be reversed and a new trial granted, with costs to abide the event.

All concur, except Parker, Oh. J., not sitting, and Gray and O’Brien, JJ., not voting.

Judgment reversed, etc.